The Slow Criminalization of Peer-to-Peer Transfers

Peer-to-peer bitcoin exchanges face new legal challenges in America and the trend will probably spread to other money-hungry countries. There is a simple reason.

Regulators use financial institutions such as banks to control the flow of wealth. The digital exchange companies that serve as “trusted third parties” are the main control points for bitcoin. That’s the point at which privacy is stripped from users, and the transfer of wealth can be closely monitored. For regulations to work, therefore, users must be herded toward trusted third parties who function as an arm of the government.

Because peer-to-peer exchanges sidestep digital exchanges, the former are slowly being criminalized.

Sal Mansy should serve as a cautionary tale.

Criminalizing Localbitcoins Exchanges

On May 17, entrepreneur Sal Mansy of Detroit, Michigan plead guilty to violating Title 18, Section 1960 of the United States Code. The statute specifically refers to Section 5330 of Title 31 in the U.S. Code of Laws, which states, in part, “Any person who owns or controls a money transmitting business shall register the business…with the Secretary of the Treasury.”

Registration involves providing the feds with an impressive list of information which culminates with the vague catch-all statement, “[s]uch other information as the Secretary of the Treasury may require.” In short, both statutes forbid a business to act as a money service without obtaining government licenses and turning over any information demanded.

The unlicensed Mansy had been trading bitcoin for years. At first, the purchase of bitcoin was apparently conducted through digital currency exchanges such as Coinbase and Bitstamp, with the sale occurring on Localbitcoins. The resulting profit was then channeled through the business bank accounts of his corporation. Coinbase closed Mansy’s account in 2014 partly because he had not registered with the US Financial Crimes Enforcement Network (FinCEN) as a money transmitter.

Unfortunately, Mansy sold bitcoin to undercover agents who may have been alerted to his activity by the digital exchanges, his bank or both. His residence was raided and three bank accounts were seized which collectively amounted to about $180,000. Mansy could receive a sentence of five years as well as a $250,000 fine. A tax investigation has not been mentioned but one seems likely to occur.

Localbitcoins is coming under attack because it is an immensely popular alternative to digital exchanges for users who wish to retain both privacy and control of their wealth. The company describes itself as a peer-to-peer exchange “where users can buy and sell Bitcoins to and from each other.” Traders advertise at the online site “with the price and the payment method they want to offer.” As in Craigslist, buyers and sellers in the same area can find each through published ads.

Mansy Is Not Alone

On May 2, prominent businessman Jason Klein pled guilty before a Missouri court to charges of “conducting an unlicensed and unregistered money transmitting business.” He had also sold coins through a Localbitcoins to “two undercover agents.” Klein ran afoul of “both the Financial Crimes Enforcement Network (FinCEN) as well as the Missouri government to operate a money transmission business.”

Both Mansy and Klein may have been selectively prosecuted due to their prominence in order to send a warning to others. The Springfield Business Journal (May 15) reported that “many [in the community] were left in disbelief and confusion after…Jason Klein pleaded guilty to a federal charge for selling bitcoin.” Klein is “president of the Association of Information Technology Professionals’ Ozarks chapter, and was elected to serve this year on the leadership council of The Network, the chamber’s group for young professionals.” He also faces up to five years in prison and/or a $250,000 fine.

If the two cases are meant as a warning to other traders, both men are likely to be both sentenced and fined.

The news feature at the Coindesk site (May 3) commented on a flurry of similar prosecutions. They include:

On April 27, Richard Petix of New York State pled guilty “to making material false statements and operating an unlicensed money transmitting business.”

On April 20, Thomas Costanzo of Arizona:

was detained by the U.S. Department of Homeland Security when officers raided his home….[A]gents were authorized to confiscate financial records and any illegal contraband in his home.

The arrest of both Petix and Constanzo had complicating factors. Petix is a sex offender who illegally accessed a computer. Constanzo possessed ammunition in violation of an agreement from a prior conviction. The money laundering charges were added later as a result of continuing investigation.

By contrast, Mansy’s and Klein’s conviction was about bitcoin, pure and simple.

A Change In How The Law Treats Peer-to-Peer?

The preceding arrests in four different states may signal a shift in how the law views and handles certain forms of peer-to-peer trading. In July 2016, for example, Bloomberg reported on “the first state money-laundering prosecution involving the virtual currency.” The article opened, “A Florida judge threw out state money-laundering charges against a man who was accused of illegally selling more than $1,500 in bitcoins to undercover detectives, concluding the virtual currency doesn’t qualify as money.” The state is appealing the decision.

Cases may no longer be thrown out. A May 6 headline in the Miami Herald stated, “Florida criminals who use bitcoins could now face money-laundering charges.” Those arrested do not need to deal drugs, sell sex or commit fraud, of course. Merely being unlicensed is a crime.

As Jamie Redman pointed out at bitcoin.com, the bill “will essentially add bitcoin to the current definitions of ‘monetary instruments’ under Florida’s money laundering act.” The bill has passed both the Florida House and Senate; it awaits the governor’s signature.

The Crucial Importance of Freedom through Peer-to-Peer

Peer-to-peer buyers do not seem to be targeted yet. Nor is it necessary to do so for Localbitcoins to halt in America. If no peer-to-peer sellers are willing to risk draconian punishment, then digital exchanges come closer to a monopoly on sales. Either that or the sellers will apply for licenses and the government will come closer to knowing everything financial about everyone.

For bitcoin to bring real freedom, it must eschew the trusted third party approach because those parties almost always interact with government agencies in much the same manner as central banks do. They strip away privacy from customers and report on their financial practices.

Peer-to-peer liberates users. Personal wealth is protected from the corrupt money-grab of central banking. The relative anonymity it brings allows freedom of speech, especially on controversial and political matters; this is why election ballots are cast in secret. Peer-to-peer also supports peaceful individuals, who are called criminals by a government, to survive the onslaught.

When Wikileaks faced a financial blockage in 2010, for example, bitcoin became the only way most people could make a donation. Many if not most of the donations were anonymous. And peer-to-peer exchanges will become even more important in the future because the other most effective and private peer-to-peer transfer is being threatened: cash.

Governments will continue to assault bitcoin and the rights of users. Digital exchanges will continue to evolve into a grotesque imitation of crony banks. Both will fail. But before they do…how many traders will face five years in prison for the ‘crime’ of selling a “good”—in both senses of the word—to a person who wants to buy it?

What is needed is an electronic payment system based on cryptographic proof instead of trust,allowing any two willing parties to transact directly with each other without the need for a trusted third party